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PowerPoint Presentation by Charlie Cook, The University of West Alabama

Planning for the HarvestPlanning for the Harvest

PART 3 Developing the New Venture Business Plan

PART 3 Developing the New Venture Business Plan

13–3

The Importance of the Harvest

• Harvesting (or Exiting)

�The process used by entrepreneurs and investors to reap the value of a business when they get out of it.

�The process involves:

�Capturing value (cash value)

�Reducing risk

�Creating future options

�When to “call it quits”?

13–4

Exhibit 13.1 Methods for Harvesting a Business

We will talk about each – except IPO

13–5

Strategic Acquisition

Value of the business is based on:

� Firm’s stand-alone characteristics, and

� Synergies that the buyer thinks can be created by the strategic fit of the firm and a potential buyer.

= $3 or more$1 + $1

1. Think of a business – which type of business would want to buy you strategically?

2. Make contact early – develop relationship (alliances)3. Buying from familiar parties is a preferred method

13–8

Financial Acquisitions

Types of Leveraged

Buyouts (LBOs)

Bust-Up LBO

Purchase with intention of selling off

assets

Management LBOTop managers become

top shareholders through debt financing

Build-Up LBO

Purchase similar firms to make up

one larger company

13–9

Selling the Firm

Sales to Employees

Employee Stock Ownership Plan (ESOP)

�Firm sold either in part or in total to its employees, usually through stock offerings

�Pros:

�Employees retirement contributions are used to purchase shares in the firm

�Motivates the employee-owners to perform better

�Cons:

�More owners may mean slow decision making

�Employees may lose $ if company does poorly

13–12

Selling A Business in Difficult Times

Selling A Business

Clean up the books

Consider your sector and market

Keep revenue strong

Before you sell try to compete - Surviving a recession (3 min)

13–13

Releasing the Firm’s Cash Flows

• Harvesting by Withdrawing Firm’s Cash

� Advantages:

� Retain control of firm

� No need to seek a buyer

� No expenses associated with sale of business

� Disadvantages

� Loss of development potential and opportunities

� Tax disadvantages of cash withdrawal

� Requires patience to siphon off cash slowly

13–17

Harvesting: Private Placement

Private Equity (Capital)

� $$ from venture capitalists

� $$ from private investors (angels)

Factors in the Transfer of Family-Owned Firms

� Liquidity for exiting family members

� Continued financing for company growth

� Maintenance of family control of the firm

13–21

Developing a Harvest Plan

• Manage for the Harvest�Manage for the long-term.

�Manage the firm first, prepare to harvest second

• Expect Conflict – Emotional�Strains of selling own business

�Personal ties to the business after sale

• Get Good Advice�Mentors with recent harvest transaction experience

�http://www.score.org LINK

• Value is in the eye of the beholder! �Video: Clip on Perceived Value

�Your business may look ugly to you, but it may look great to a potential buyer!

13–22

Developing a Harvest Plan

Understand What Motivates Your Exit

�Motives for exiting:

� Money

� Independence

� Health of the company

� Your management team

� An heir apparent taking over

�Personal identity and the business itself

�Avoid “seller’s remorse”

13–23

Getting Out of Crisis – How To …

• In many companies you may need to play all roles –(from CEO level to worker bee)

• “Putting out fires” concentrates on “worker bee” skills –(Ever get busy yet get nothing done?)

• Owner can often get stuck in “worker bee mode”

• If in crisis:

1. Go to problem solving (worker bee mode)

2. Then jump to planning (CEO mode) and look at trends and SWOT (commit to calendar)

3. Get back to (worker bee mode), BUT set planning time for yourself and those appropriate to help you (calendar)

4. If not favorable after planning, then plan for harvest

13–24

Scenario Planning - can help preclude a harvest

1. Issue identification:What is it that happens (perhaps on a recurrent basis) that needs to be resolved

2. Identify the variables that cause the issue to occur: Usually only a few things really make the difference. As per the 80/20 rule, we need to identify

which (few) variables really make a difference regarding the issue we identified. What are the

primary causes of this?

3. Develop a list of "alternate outcomes" for each variable (Think through this step well):For each variable (identified in step 2), try to brainstorm a list of how it may possibly

materialize (occur). What are the ranges of possibilities for each variable? Identify as many

alternate outcomes for each variable as you can. Number them.

4. Consider the implications for each alternate outcome:Consider the reality that each of the "alternate outcomes" (from step #3) may emerge

A. Probability:Identify, for each, what we feel is the probability for it to actually occur.

B. Plans and action: Then, for each, consider how we should perhaps change our plans, and which actions we

may need to take, assuming that it may occur.

C. Best choice:After we have estimated the probabilities, effects on our plans, and appropriate actions to

take for each, then we need to assess which (step "B") may be the most acceptable

action plan for us. This may help guide us as we react to any given situation.

13–25

Scenario Planning - can help preclude a harvest

5. Identify "early warning" signals and watch for them:For each alternate outcome ( step #3) identify an early warning and measurement

system.

A. Early warning indicators:Identify, for each alternate outcome, occurrences that can be observed. Consider (for each alternate outcome) what we might be able to notice, early on, that may warn us that it may actually occur. What are the subtle indicators that may help us predict that something may happen in the future?

B. Measurement systems:How can we enhance our measurement systems so that we are constantly monitoring the "early warning indicators"? Once a measurement system is in place, we can be confident that we are sensitive to appropriate indicators, and that we are consistently scanning for them. This foresight can help us to notice potential problems in their early stages, and execute contingency plans based on thoughtful consideration of potential outcomes.

Go to: My Home Page, click on Entrepreneurship, Link for “Scenario Planning”

Blue Ocean Strategy

An introduction with example

What is “Red Ocean”?

“Blue Ocean” -Unknown market space

Blue Ocean Strategy

• Create new market space (not outperform existing competition)

• Result of study of more than 30 industries over 100 years

• Reproducible tools to pursue innovation

• Strive for differentiation AND low cost

• Here’s how to do it . . .

Industry Value/Cost Curve

Value/Cost Curve – Lower Costs

Value/Cost CurveStill in the Red Ocean

Beyond the Value/Cost Curve

Beyond the Value/Cost Curve

Value Innovation –Blue Ocean Strategy

Example

Noncustomer Exercise

� Medium/high-income

� White-collar workers

� Barbers

� Life-lasting razors

� Forged blade

� Size of blade

� Price of razor

3rd Tier Noncustomers:

women2nd Tier Noncustomers:

low-income1st Tier Noncustomers:

occasional shaversShavingmarket

The remaining 66 million lived in

nonmetropolitan territory and could

not easily go to the barbershop

� 40% of total population had low incomes

� 2 million people unemployed

� 30 million below the poverty level

� 37 million (49%)

� 12 million between 20-39

� Can they realistically go to the barbershop?

� Price

� Safety

� Ease of use

� Maintenance-free

� Fashion and image of shaving

Eliminate

Life-lasting razors

Forged blade

Raise

Safety

Ease of use

Create

Maintenance-free

Fashion & image

Reduce

Size of blade

� In 1903 Gillette invented a safety razor with disposable blades

� The razor required a small initial investment

� Gillette changed the business model of the industry

hi

off

eri

ng

leve

l

lo

Gillette’s Safety Razor

Straight Razor

Eliminate Reduce Raise Create

Shave Yourself

• It’s safe

• It’s private

• It’s economical

• It’s easy

� In the 1910s, hair removal for women started to become fashionable

� Lengths of skirts and dressed reduced

� This triggered Gillette to introduce the Milady Décolletée

Copyright © Blue Ocean Strategy Institute 2008

� During WWI, soldiers needed to be clean-shaven in order to fit the gas mask properly

� It became imperative for them to shave

� Gillette partnered with the US army, selling 3.5m razors & 32m blades

� When they returned home, they were heroes. It became the fashion to be clean shaven.

� Before 1745, barbers also performed surgery

� Bloodletting was a popular medical practice

� The spiralling red and white stripes symbolized blood & bandages

Eliminate, Reduce, Raise, Create

Short FILM (3 min)

Going After Unserved or Underserved Markets